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UK interest rate maintained at 4.5%

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07/06/2006

The Monetary Policy Committee of The Bank of England voted on Thursday to keep interest rates unchanged at 4.5% for the tenth consecutive month.

The decision had been widely expected, although some economists believe a rate rise is in the pipeline for later this year.

The hawks believe that a rate increase may be necessary to keep a lid on inflation which, according to the Bank’s most recent quarterly inflation report, could exceed its 2% target this year if base rates remain at 4.5%.

However, recent stock market falls and the strength of Sterling against the US dollar may have stayed the Bank’s hand this month. Recent sets of figures have also sent out mixed messages, with high street spending up slightly after a damp early May, but continued weakness in the manufacturing sector, while the job market has improved. Almost 220,000 jobs were created in the year to March 2006.

The CBI employers’ group said it was relieved that the Bank had left rates unchanged. “The economy is recovering from the doldrums of last autumn, raising some fears of the prospect of a modest acceleration in inflation,” said Ian McCafferty, CBI chief economic adviser.

“So far, though, this is unproven, and any upward move in rates would have been premature. Leaving rates unchanged sends out a confidence-enhancing message of stability.”

Housing market
Mortgage borrowers on variable rate deals were relieved at the decision, as every 0.25% rate rise means an increased payment of around £15 a month on a £100,000 homeloan.

A stronger than expected surge in property prices early this year had fuelled speculation that a rate rise might be needed to keep the housing market in check.

But the market has shown signs of cooling off in recent months, with mortgage approvals dropping in April and house prices reported as flat in May by lenders. The impending World Cup is likely to further dampen the market.

“Previous Football World Cups have resulted in a sharp reduction in some economic activity, particular house buying and remortgaging,” says Ray Boulger, senior technical manager at brokerage John Charcol.

“Mortgage approvals have dropped off from the very high levels achieved in the winter and in fact the latest Bank of England figures show they are now at their lowest since September last year.”

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